gets a reasonable wage for her work as compared to other bookkeepers. In a year, she might earn $4,000. That $4,000 will be a deduction to her parents. She doesn’t earn any other income and the standard deduction plus her exemptions is more than $4,000. So, she doesn’t pay any tax. In my client’s 40 percent tax bracket, that $4,000 in pay to their daughter means a tax savings of $1,600.
Now, for the best part. My client’s daughter is learning how to do bookkeeping and becoming part of their business. She is gaining a skill that will benefit her for her entire life, and she is beginning to understand real estate investing. No wonder Congress allows this type of planning.
In fact, Congress not only allows it but also encourages it. My friend gets a tax break on Social Security taxes as well for employing his daughter instead of employing someone else to do the bookkeeping. He doesn’t have to pay any Social Security taxes on her wages.
So don’t hesitate to put your children to work in your business. There are great tax benefits for you, huge educational benefits for them, and you have someone in place to take over when you are ready to retire. What an incredible exit strategy! It’s one that the rich have known about for years and years. That’s how they keep their money in the family, and keep the business going after they are gone.
You Can Deduct Almost Anything
“I would like to electrocute everyone who uses the word “fair” in connection with income tax policies.”
– William F. Buckley, Jr.
Stop Being Average
Taxes aren’t fair to the average taxpayer. Just who is the average taxpayer? The average taxpayer has a job, a family, and a mortgage or rent. The average taxpayer has little to no financial education. The average taxpayer gets his advice from CNN and H&R Block. The average taxpayer’s only available tax benefits are the standard deduction or a few itemized deductions, such as home mortgage interest and charitable contributions. Oh, and, of course, a 401(k) or IRA in the U.S. or RRSP in Canada to postpone a portion of their tax burden until retirement.
The reality is that average taxpayers have average tax benefits. Average taxpayers come to me from time to time asking for my advice. They ask how they can reduce their taxes. Should they put more into their 401(k)? Should they buy a bigger house? While they’re at it, should they have more children?
The reality is that average taxpayers have average tax benefits.
My answer to these folks is that as long as they’re living the life of an average taxpayer, there’s nothing much I can do for them. The solution is to stop being average. Instead, become an above-average or super taxpayer. Start doing what Congress or Parliament wants you to do by contributing more to the economy. The good news is that you’re on your way to becoming a far better than average taxpayer just by reading this book. You’re gaining financial intelligence with each page you read. When you apply the concepts you learn here, you’ll really take off.
My answer to these folks is that as long as they’re living the life of an average taxpayer, there’s nothing much I can do for them. The solution is to stop being average.
Like most professionals, I started advising people on what to do regarding their taxes long before I followed my own advice. Even before finishing graduate school, I gave people tax advice. I told business owners how to reduce their taxes even though I didn’t own a business. I told real estate investors how to increase their deductions long before I owned any real estate of my own. Was the advice good? Sure. I was a smart kid who’d applied himself at school and learned the law. Was the advice great? No.
How could I possibly give great advice to other people when I’d never applied what I’d learned in school to my own situation? It wasn’t until I started my own business and later began investing in real estate that I really began giving great advice to business owners and investors. Once I applied my knowledge in my own life, I finally understood my clients’ businesses and gave them top-notch advice. The more I personally applied my knowledge, the better I became at giving advice to others.
The same will be true for you. Once you start applying the concepts of this book in your own life, you’ll start to see how it all works. Once you begin reaping the rewards of lower taxes and more cash flow, you’ll better understand what you’ve learned while at the same time reaping all the benefits of your knowledge. That’s called wisdom.
So what’s the first step to becoming a super taxpayer? Understanding rule #6.
| RULE #6: | You can deduct almost anything given the right circumstance. |
It’s true. Almost any expense can be deductible from your income given the right situation. How can that be possible? It’s how the law works. Remember when I said that the tax laws favor entrepreneurs and investors? That’s because entrepreneurs and investors generally put money into the economy to produce rather than consume. The key to making an expense deductible is to make it a business or investment expense. As long as the purpose of the expense is to produce more income, it can be deductible.
If the purpose of the expense is to produce more income, it can be deductible.
And yes, this principle applies worldwide. All income taxes in developed countries are based on net income, which is simply income after deductions. And deductions come from expenses. Business expenses are the best kind of deductions. Real estate expenses are the next best. Depending on your country, chances are that expenses relating to energy are good as well. Even expenses related to investing in the stock market may be partially deductible, though these are the least deductible because they aren’t active investments.
Your first step to increasing your deductible expenses is to become an entrepreneur or investor. Until you take this step, you’ll always be an average taxpayer and the tax laws will be stacked against you. The good news is that you don’t have to quit your job. You just have to start acting like an entrepreneur or an investor. That means the first thing you need to do is to increase your financial intelligence by investing in financial education. Starting a business or investing in a deal without financial education is the riskiest action you can take with respect to your money.
Become an Entrepreneur
Here’s my advice whenever starting out: Start small. Take a course in real estate or some other type of investing. Take a course in entrepreneurship. Start a home-based business—preferably dealing with something you know about.
That’s how I got started. Many years ago, after I’d left public accounting and became the in-house tax advisor for a Fortune 1000 company, I decided to go back into public accounting. I missed the clients, and I missed the challenge. But in that transition I made a bad decision and took the wrong job with the wrong company. Seven months later, I was fired. For the first time in my life, I’d failed at a job, and a job had failed me. It turned out to be one of the best days of my life.
I suddenly realized that not having a job freed me up to do what I’d always wanted to do—start my own business. I had a master’s degree and 13 years of experience as a tax advisor. It was time to start my own
